Prague Economic Papers 2023, 32(6):608-627 | DOI: 10.18267/j.pep.844
CAT Bonds: A Suitable Systemic Approach for Handling Catastrophic Risks in the Czech Republic?
- Faculty of Finance and Accounting, Department of Banking and Insurance, Prague University of Economics and Business, Prague, Czech Republic
Catastrophic natural events in the Czech Republic have always caused a considerable burden on public finance. However, this risk can be transferred to capital market investors through CAT bonds, which have never been used for this purpose in the Czech Republic. The paper deals with the theoretical background of CAT bonds, resulting in a back test simulation of a hypothetical CAT bond issued for the period 1999-2003. As a result, by transferring the risk to the capital market, investors could save a significant part of the Czech Republic's public funds.
Keywords: CAT bonds, insurance, reinsurance, government's expenditures, catastrophic events
JEL classification: G22, G30, H50, H82, H84
Received: August 5, 2022; Revised: May 13, 2023; Accepted: June 21, 2023; Published: December 19, 2023 Show citation
References
- ARTEMIS. (2022). ILS & Catastrophe Bonds Market Reports.
- Barrieu, P., Loubergé, H. (2009). Hybrid CAT Bonds. Journal of Risk and Insurance, 76(3), 547-578. https://doi.org/10.1111/j.1539-6975.2009.01312.x
Go to original source...
- Braun, A., Kousky, C. (2021). Catastrophe Bonds. Risk Management and Decision Processes Center. Wharton. University of Pensylvania.
- Carter, R. L. (1995). Reinsurance, Third Edition. The Mercantile and General Reinsurance Company plc. Avon. (pp. 20-137).
- Cummins, J. D. (2008). CAT Bonds and Other Risk-Linked Securities: State of the Market and Recent Developments. Risk Management and Insurance Review. https://doi.org/10.2139/ssrn.1057401
Go to original source...
- Cummins, J. D. (2012). CAT bonds and Other Risk-Linked Securities: Product Design and Evolution of the Market. Risk Management & Insurance & Actuarial Science, 2012(1), 11-31. https://doi.org /10.2139/ssrn.1997467
Go to original source...
- Cummins, J. D., Dionne, G. (2009). Introduction to the Scor-Jri Special Issue on New Forms of Risk Financing and Risk Engineering. The Journal of Risk and Insurance, 76(3), 459-462. https://doi.org/10.1111/j.1539-6975.2009.01316.x
Go to original source...
- Czech Insurance Association. (2022). Mimořádné Živelní Škody. Available at: www.cap.cz
- Czech National Bank. (2022). Kurzy Devizového Trhu. Available at: www.cnb.cz
- Downs, A. (1998). Political Theory and Public Choice. Edward Elgar Publishing, number 1411.
Go to original source...
- Finken, S., Laux, Ch. (2009). Catastrophe Bonds and Reinsurance: The Competitive Effect of Information-Insensitive Triggers. Journal of Risk and Insurance, 76(3), 579-605. https://doi.org/10.1111/j.1539-6975.2009.01317.x
Go to original source...
- Götze, T., Gürtler, M. (2021). Risk Transfer Beyond Reinsurance: the Added Value of CAT Bonds. Geneva Papers on Risk Insurance Issues and Practice, 47, 125-171. https://doi.org/10.1057/s41288-021-00234-6
Go to original source...
- Gürtler, M., Hibbeln, M., Winkelvos, Ch. (2014). The Impact of the Financial Crisis and Natural Catastrophes on CAT bonds. Journal of Risk and Insurance, 83(3), 579612. https://doi.org/10.1111/jori.12057
Go to original source...
- Hochrainer, S. (2009). Assessing the Macroeconomic Impacts of Natural Disasters: Are There Any? World Bank Policy Research Working Papers, No. 4968. https://ssrn.com/abstract=1427628
Go to original source...
- Horvath, R. (2021). Natural Catastrophes and Financial Depth: An Empirical Analysis. Journal of Financial Stability, 53, 120-150. https://doi.org/10.1016/j.jfs.2021.100842
Go to original source...
- Jackman, F. (2021). Catastrophe Risk: a Wake up Call for Insurers. Global Capital Securization.
- Jedlička, P. (2022). ČAP. E-mail correspondence.
- Kish, R. J. (2016). Catastrophe (CAT) bonds: Risk Offsets with Diversification and High Returns. Financial Services Review, 25(3), 303-329. https://doi.org/10.61190/fsr.v25i3.3281
Go to original source...
- Lakdawalla, D., Zanjani, G. (2011). Catastrophe Bonds, Reinsurance, and the Optimal Collateralization of Risk Transfer. Journal of Risk and Insurance, 79(2), 449-476. https://doi.org/10.1111/j.1539-6975.2011.01425.x
Go to original source...
- Martin, I. W. R., Pindyck, S. R. (2021). Welfare Costs of Catastrophes: Lost Consumption and Lost Lives. The Economic Journal, 634(131), 946-969. https://doi.org/10.1093/ej/ueaa099
Go to original source...
- Ministry of Finance of the Czech Republic. (2022). E-mail correspondence.
- Ministry of Finance of the Czech Republic. (2022). Účetní Výkazy za Českou Republiku. Available at: www.mfcr.cz
- Melecky, M., Raddatz, C. E. (2011). How Do Governments Respond after Catastrophes? Natural-disaster Shocks and the Fiscal Stance. Policy Research Working Papers, Series 5564, The World Bank.
Go to original source...
- Nell, M., Richter, A. (2004). Improving Risk Allocation Through Indexed CAT Bonds. The Geneva Papers on Risk and Insurance, 29(2), 183-201. https://doi.org/10.1111/j.1468-0440.2004.00281.x
Go to original source...
- Pearsons, R. (2004). Insuring the Industrial Revolution. Fire Insurance in Great Britain, 1700-1850. Imprint Routledge. London. ISBN: 9781315252193. https://doi.org/10.4324/9781315252193
Go to original source...
- Polacek, A. (2018) Catastrophe Bonds: A Primer and Retrospective. Chicago Fed Letter, No. 405, 2018.
Go to original source...
- Rode, D., Fischhoff, B., Fischbeck, P. (2000). Catastrophic Risk and Securities Design. Journal of Psychology and Financial Markets, 1(2), 111-126. https://doi.org/10.1207/S15327760JPFM0102_3
Go to original source...
- OECD. (2018). Financial Management of Catastrophe Risks. Approaches to Building Financial Resilience. Available at: https://www.oecd.org/finance/insurance/Financial-management-of-catastrophe-risks-approaches-to-building-financial-resilience.pdf
- Standard & Poor´s (2015). Annual Report 2015. Available at: https://s29.q4cdn.com/690959130/files/doc_financials/2015/ar/2015-Annual.pdf
- Stádník, B (2017). Framework for Valuation of CAT bonds. 11th International Scientific Conference on Financial Management of Firms and Financial Institutions Conference, PTS 1(3), 763-772.
- Stádník, B. (2022). Convexity Arbitrage - the Idea Which Does not Work. Cogent Economics & Finance, 10(1), 2019361.
Go to original source...
- Thirawat, N., Udompol, S., Ponjan, P. (2017). Disaster Risk Reduction and International Catastrophe Risk Insurance Facility. Mitigation Adaptation Strategies for Global Change, 22, 1021-1039. https://doi.org/10.1007/s11027-016-9711-2
Go to original source...
- Trottier, D.-A., Lai, V.S. (2017). Reinsurance or CAT bond? How to Optimally Combine Both. Journal of Fixed Income, 27(2), 65-87. https://doi.org/10.3905/jfi.2017.27.2.065
Go to original source...
- Vivek J., Kunreuther, H. (2000). A CAT Bond Premium Puzzle? Journal of Psychology and Financial Markets, 1(1), 76-91. https://doi.org/10.1207/S15327760JPFM0101_07
Go to original source...
- Von Peter, G., Von Dahlen, S., Saxena, S. C. (2012). Unmitigated Disasters? New Evidence on the Macroeconomic Cost of Natural Catastrophes. BIS Working Papers, 394. Bank for International Settlements.
- Wasow, B., Hill, R. D. (1986). The Insurance Industry in Economic Development. New York University Press; 1St Edition (November 1, 1986). ISBN: 978-0814792117
This is an open access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY NC ND 4.0), which permits non-comercial use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.